If you run your own business and are thinking of setting up a limited company, there are various reasons as to why this may prove advantageous: from potential tax savings to reduced personal liability. However, the process of forming a company can be longwinded, and there are several things to consider before you can begin.
In order to set up your limited company, you will need to submit an application to Companies House. This can be done via electronic means or by filling out the IN01 form manually and posting this. Alternatively, you may wish to consult an accountant and instruct them to oversee your application – this will ensure that all information is correct and give you the best chance of having your form approved quickly.
Whichever route you decide to pursue, you will need to make a number of crucial decisions before you can begin your application, and will also need to have all the required information to hand. Keep reading for our rundown of the key considerations.
1. What Will You Be Called – and Where Will You Be Registered?
A company name may not sound like a big deal, but it’s important to get it right. Moreover, there are some restrictions: your name can’t contain any trademarks, for instance, and it must be unique and appropriately reflective of what you do.
If you’re forming a company in England or Wales, you must have a registered address within that country. Official mail will be sent to your registered address, so you should ensure that you give appropriate details. This doesn’t mean that you need to operate out of separate business premises; many business owners utilise PO boxes or receive company mail at their private residences.
2. Who Will Run the Limited Company?
Limited companies need to have at least one director, so this is the first port of call. It’s no longer compulsory to nominate a company secretary, though you may find it helpful to have one – a company secretary fulfils several useful functions, such as overseeing high-level administration (communications with shareholders, for instance) and corporate governance.
When you are filling out your application, you will need the following details to hand:
- The full names of all those holding official positions.
- Their nationalities and dates of birth.
- Their addresses. Directors may choose to give what is known as a ‘service’ or ‘official’ address to protect their privacy.
3. Who Will Hold Shares?
The appointment of shareholders and the division of shares are matters that deserve serious consideration. Even if you intend to run the business alone, there may be tax benefits to apportioning some shares to a spouse, for instance, rather than holding all the shares in your name. Remember, too, that when the time comes to draw on dividends, these must be distributed proportionally in correlation with shareholding percentages. The legislation surrounding shares and shareholders can be complex; as such, we highly recommended seeking tax advice from an accountant before committing yourself to any particular action.
When the time comes to appoint your shareholders, you will need the following details:
- The full name and address of each shareholder.
- The number of shares and class of shares they will own.
- As you will not be able to take a signature from each shareholder to verify their identity, three sets of personal information will need to be submitted instead, such as: their NI number; their mother’s maiden name; or the town they were born in.
As well as providing information on shareholders and other company officials when setting up your limited company, you will also need to keep a record of ‘People of Significant Control’ (all those who have 25 or more of the voting rights, and/or those who own 25 or more of the share capital). This information must be submitted to Companies House each year through the company’s annual Confirmation Statement.
4. What Will the Business Do?
When setting up a company, you will need to define the nature of your work by choosing an appropriate ‘Standard industrial classification of economic activity’ code (SIC). These range from manufacturing to the leasing of property, and a full list can be found on the Gov.uk website.
On the form, you’ll be given the opportunity to enter up to four codes; so if you aren’t sure that all your professional activities fall neatly into one bracket, you can choose a number of codes to suit your business interests.
5. What Rules Will the Business Be Governed By?
There are two vital documents that all companies must possess: Articles of Association, and a Memorandum of Association.
The Memorandum of Association is the template for setting up the company: it’s essentially a confirmation that all initial shareholders agree to form the company in the first place. It must contain the following wording:
Each subscriber to this memorandum of association wishes to form a company under the Companies Act 2006 and agrees to become a member of the company and to take at least one share.
A list of all ‘subscribers’ (shareholders) should also be enclosed.
The Articles of Association, by contrast, is a template as to how the limited company will be run: it governs everything from voting rights to the specific powers of the directors. You can draw up your own set of Articles, though most choose to use the model articles provided by Gov.uk – by doing so, you are able to submit your application online (if you choose to draw up your own, unique document, you will need to file your application via post and enclose a copy of the Articles within).
- Tax obligations for limited companies and sole traders are very different – and HMRC won’t wait for you to figure it out. It’s important that you hit the ground running, so do seek proper advice sooner rather than later. You’ll need to register for corporation tax within three months of trading as a company, for instance, and you may need to register for VAT.
- Similarly, company directors have specific financial and legal obligations, so it’s important that you’re fully apprised of your responsibilities.
- When it comes to running a limited company, the paperwork involved and records required are specific and – unfortunately – more onerous. Make sure that you are aware of your responsibilities, particularly when it comes to maintaining statutory records.
This blog is part of a series. IBISS & Co are dedicated to providing a valuable resource for clients and other professionals via weekly blogs covering everything from international tax law to general business advice. Follow us on Facebook or Twitter to receive the latest updates on our recently published articles.